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Firm looks to light up pot sales with Canadian unit

Photo by GLENN TRIEST
Creative Edge President and CEO Bill Chabaan expects the company to generate revenue of $20 million in the first 12 months.

A publicly traded, Madison Heights-based company has set up a subsidiary just across the Canadian border to grow and sell 1.3 million pounds of marijuana a year.

Creative Edge Nutrition Inc., a nutritional supplement company that sells products for the likes of weight loss and energy boosting, formed CEN Biotech Inc. in Lakeshore, Ontario, just outside Windsor, to take advantage of the increasingly legal market for marijuana.

Canadian federal regulator Health Canada operates a system for providing medical marijuana to patients with prescriptions from doctors. CEN Biotech expects to receive approval to become a direct provider to patients through the system in April or May, said Creative Edge President and CEO Bill Chabaan.

The company is doing the final build-out stage of its indoor hydroponic grow operations and, once finished, will go through government inspections for security, quality and tracking as part of the final approval process.

Licensure of the facility would come with an import-export license. The company plans to sell to Canadian patients upon approval, while immediately working to begin sales in countries that allow the importation of medical marijuana, such as Israel, Uruguay and the Netherlands. Even Iran and North Korea allow it, and CEN Biotech is willing to enter those markets, he said.

"Obviously, we'd have to fill out the necessary documentation, but we'll sell to anyone," Chabaan said.

CEN Biotech has eyes on the U.S., too. While many American states have relaxed marijuana laws, the federal government has not, so the company won't be trucking pounds of weed over the Ambassador Bridge any time soon.

Changing laws?

But Chabaan sees the tide turning down the road. Evidence of this, he said, is population heavyweight New York now signaling a slight easing of its rules to allow patients at a restricted number of hospitals to obtain marijuana.

With other states like Colorado and populous California already well down the road to full legalization, Chabaan expects the U.S. to join the countries that allow the importation of medical marijuana within the next year and a half.

Matthew Abel, an attorney who runs a Detroit-based practice called Cannabis Counsel and leads the Michigan chapter of the National Organization for the Reform of Marijuana Laws, NORML, said while the Midwest has taken a slower path toward relaxing marijuana laws than California and Colorado, it is moving in that direction and likely will continue to do so.

"Things haven't moved as fast as some of us would like, but we're pleased to see some movement. It's been a long time fighting this fight, and I think we're on the verge of legalization," Abel said.

Michigan has taken the lead in the Midwest when it comes to loosening marijuana laws, Abel said, with Illinois being the only other Midwestern state that has made any significant moves.

Gov. Rick Snyder signed a bill last month that allows for the creation of a similar system as the one Health Canada is putting in place, though it would not ban individual growers. Public Act 268 would allow licensed organizations to sell pharmaceutical-grade cannabis, just as the Canadian system does, but the federal government would have to decriminalize marijuana for the law to take effect.

Another bill, passed by the Michigan Legislature and now sitting in the Senate, would let municipalities set up ordinances allowing dispensaries to sell medical marijuana.

Abel said sooner or later the federal scheduling of marijuana is going to have to change. "That's been the holy grail for us for 40 years now. At some point Congress is going to have to wake up and smell the marijuana."

As for CEN Biotech, Chabaan expects the company to generate revenue of $20 million in the first 12 months of operations, and $100 million a year by the fifth year of operations. Parent Creative Edge Nutrition trades under the OTC Markets ticker FITX and had an estimated $3 million in revenue last year. Shares were trading at about 2 cents a share last week.

Even with approval from Ottawa, a business still must get approval from the local Canadian municipality and its police and fire officials. Lakeshore Mayor Tom Bain said the town — just east of Windsor — supported the plan because of its interest in diversifying its economy, which has heavily leaned on feeder plants to the automotive industry in the past.

Lakeshore is a mix of industrial, residential and rural areas; a move to diversify the agricultural side of its economy by supporting greenhouse businesses makes sense and follows a general trend in Essex County, Bain said.

"We recognize that one of our biggest strengths is in the agricultural area," he said.

CEN Biotech, which sits on farmland next to a provincial police station, consists of a "compound" of several buildings, including steel barns for the greenhouses and administrative offices, Chabaan said. Some 58,000 square feet of greenhouse space is being added to an existing 27,000 square feet of space, for a total build-out cost of $12 million.

Security regulations for running a grow operation are especially stringent. CEN Biotech will use off-duty officers from the station next door as part of its security team.

The company plans to grow 50 strains of marijuana, from seeds sourced in Canada, Mexico and Colombia. The number of marijuana strains has exploded in the past decade, with colorful but unbusinesslike names such as OG Kush and Shishkaberry to distinguish them. CEN Biotech will use its own naming convention, most likely along the lines of "CEN" followed by a number.

"No OG Kush," Chabaan said.

Hashing out the rules

CEN Biotech's gambit comes at a turning point for the Canadian medical marijuana industry. The government is in the midst of moving from an individual-grower system that's been in place since 2001 to a commercial-grower system.

The government announced this move last June, casting it as a public safety measure. Individual licenses that allow people to grow and possess will be fully phased out by April 1 in lieu of commercially licensed operations blessed by the regulator and listed on its website as designated providers. Orders have to be done through the mail as storefronts are no longer permitted.

As of Jan. 2, Health Canada had received 373 applications for commercial production, said Sara Lauer, media relations officer, and there is as of yet no cap on the number that could be approved. Only three applications, all Canada-based, have been approved so far.

Lauer could not comment on the status of CEN Biotech's application or confirm that it had applied, for business privacy reasons.

Don Schultz, owner of Greenline Academy in British Columbia, said it's a business with inherent risks — a business owner can't be sure the government won't reverse its marijuana laws — and it's still a market with built-in limitations in the form of approvals for patients. As of September of last year, about 37,000 people were authorized to possess medical marijuana, according to Health Canada.

But the market is growing, and there still is room for "many more" operators beyond those that have applied, Schultz said.

Schultz's consultancy helps businesses obtain medical marijuana licenses, and he has applied for one under the new system.

CEN Biotech's planned volumes puts it in the largest regulatory category and at the upper limit of Schultz's operational comfort level. Beyond that, it becomes hard to find employees who can be trusted to work with marijuana, and the stringent security regulations become onerous. The government "can shut you down any time" it feels like if it determines regulations aren't being followed, Schultz said.

"The industry is too unknown," he said. "Scale like that comes with a lot of responsibility."

Another risk is if a country like Uruguay starts exporting, bringing down prices from the current rate in Canada of about $9-$14 a gram to somewhere around $3 Canadian. And he doesn't see the U.S. opening up to imports any time soon.

He said industry watchers predict a mix of a few large-scale operators and many small ones will emerge, following the same consumer patterns that make people choose between Wal-Mart and smaller stores.

Schultz is looking to stay within a range of 10,000 to 50,000 square feet. An operation at the low end of that range can produce a few hundred pounds a month, he said.

The industry in Canada now stands at about $1.2 billion Canadian. The changing national system makes the future hazy, and Schultz wouldn't venture a guess as to the level of growth the industry would experience in the years ahead.

"It's hard to project something no one knows about just yet," Schultz said. "A lot of people are walking into this kind of blind. That's why I start slow.

"It's high-risk, but it could pay off enormously" in five to six years if everything stays on track, he said.

Chabaan said finding workers won't be an issue because Essex County has a large greenhouse industry from which to source workers, and the recent closure of a H.J. Heinz Co. factory means people are looking for work.

CEN Biotech will start by hiring up to 50 workers and producing 5,000 pounds of marijuana this year. Chabaan doesn't expect to hit full capacity at the site's 10 acres until five years into business operations.

The Canadian market will grow beyond its current 37,000 patients once the new system fully comes online and the patient approval process becomes more streamlined, he said, and the company is banking on its export business to soak up volume.

"We're going large; we're going to do it right," Chabaan said. "We're not in to make just a little bit. We want to dominate the market."